Whole Loan Capital, LLC

Mortgage Servicing Rights

Mortgage Servicing Rights ("MSRs") are agreements whereby a mortgage servicer performs collection and accounting of mortgage payments from borrowers, and remittance of those payments to the mortgage investors. In addition the servicer typically pays real estate taxes and hazard insurance out of the borrower's escrow payments while accounting for same. In the event of a default by the borrower, the servicer takes care of foreclosure and/or modification (loss mitigation).

On a conventional loan, servicers are typically paid 25 basis points, based on the loan's current balance. Loans in default cost significantly more to service than loans that are current, thus smaller or higher risk loans may require a higher servicing fee.

MSRs are bought and sold by servicers on a regular basis, typically as part of a balance sheet management strategy. As most MSRs are for loans sold (packaged or guaranteed) to either Fannie Mae, Freddie Mac, or Ginnie Mae (the "Agencies"), the relevant Agency has to approve any MSR transfer. MSR transfers are only allowed if the buyer is an approved Agency servicer in good standing. In addition servicers need to be licensed in most states.

MSRs provide a positive yielding hedge against long duration fixed income assets, due to their negative duration.

The significant spike in the number of borrowers defaulting in the past decade dramatically increased the need for loss mitigation efforts within mortgage servicers. The largest servicers, most of which are banks, found it difficult to respond to this need, so as regulators and governmental enforcement agencies ramped up their efforts to assist homeowners, they began selling MSRs.

Today "forced" selling by banks and possible regulatory changes that may limit the value of MSRs held by banks (Basil III), coupled with lower interest rates, have resulted in historically low prices for MSRs trading in the market. Returns on those MSRs are attractive so many non-servicer institutional investors and hedge funds are trying to figure out how to invest.

Barriers to entry are significant, as are some of the risks, but for the right investor MSRs can offer very attractive returns. Leverage is also possible.

Whole Loan Capital has worked with servicers and investors to facilitate investments in MSRs through excess strip structures.

MSRs are bought and sold by servicers on a regular basis, typically as part of a balance sheet management strategy. As most MSRs are for loans sold (packaged or guaranteed) to either Fannie Mae, Freddie Mac, or Ginnie Mae (the "Agencies"), the relevant Agency has to approve any MSR transfer. MSR transfers are only allowed if the buyer is an approved Agency servicer in good standing. In addition servicers need to be licensed in many states to service loans in that state.

As a hedge vehicle MSRs can be used to offset changes in the value of long duration fixed income assets, due to their negative duration.

As a hedge vehicle MSRs can be used to offset changes in the value of long duration fixed income assets, due to their negative duration.

As a hedge vehicle MSRs can be used to offset changes in the value of long duration fixed income assets, due to their negative duration.